/Episode #149: Phil Haslett, “Lyft’s Doing $2 Billion Dollars A Year In Revenue, And It’s Growing That Revenue 105% A Year. There Are Only 8 Companies Listed On The Stock Exchange In The U.S. With That Kind Of Profile”

Episode #149: Phil Haslett, “Lyft’s Doing $2 Billion Dollars A Year In Revenue, And It’s Growing That Revenue 105% A Year. There Are Only 8 Companies Listed On The Stock Exchange In The U.S. With That Kind Of Profile”

Episode #149: Phil Haslett, “Lyft’s Doing $2
Billion Dollars A Year In Revenue, And It’s Growing That Revenue 105% A Year.
There Are Only 8 Companies Listed On The Stock Exchange In The U.S. With That
Kind Of Profile”

Guest: Phil Haslett is a founder and Chief Revenue Officer of EquityZen, a platform for secondary transactions in private, pre-IPO companies. He helped found the platform in 2013 and they have since completed over 5,000 transactions in over 100 private issuers. Prior to EquityZen, Phil was a Vice President at Pomelo Capital, a NYC-based hedge fund, focusing on capital structure arbitrage, and before that he started out at Barclays Capital in their Proprietary Trading group.

Date Recorded: 4/1/19

Run-Time: 59:20

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Summary: In episode 149 we welcome back our guest from Episode 122, Phil Haslett. Meb and Phil begin the episode with a chat of the IPO environment so far in 2019, and the recent Lyft IPO. Phil then gets into the cyclicality of IPOs in general, and that IPOs tend to be most successful when the market is not so volatile.

Meb asks Phil about the IPO process. Phil
starts with banking and how the banking relationship works, and what some
companies have done to avoid the high costs of going through the IPO process. Google
was the first to give an alternative approach to the IPO process a shot, and
Spotify found huge success through a direct listing.

Next, Phil gets into the changing characteristics
of what firms look like in today’s IPO cycle, vs. the past. He discusses that
the value of which companies go public is far higher than it used to be, and
they are going public much later. This stems from companies raising large
amounts of capital as private companies. Eventually, though, they’ll need to go
public for a couple of reasons. 1) venture capital investors that invested
early, may run out of patience waiting for an exit, 2) the need to address
liquidity for other shareholders 3) recognition, and 4) be able to issue stock
and raise capital for potential future M&A.

The conversation then shifts back to Lyft, and
their S-1 filing.

Phil mentions some interesting points he and
his team found in the S-1. He discusses Lyft’s $300 million R&D spend,
signaling the likelihood it is making major investments, possibly in autonomous
driving. They also found that the company has presented itself as a
transportation as a service (TaaS) company.

Meb brings up the topic of dilution, and why
it is so important in understanding venture capital investing, and Phil walks
through the fundamentals of capital raising, and shareholder dilution, and what
it really means to early investors.

Next, employee wealth, and how to think about
managing it is addressed. Phil shares some advice of being diversified to
offset the concentration that comes with both owning shares and earning a
paycheck from the same company.

As the conversation begins to wind down, Phil
covers his take on the future of the private investment space.

Hear all this and more in episode 149, including the future of EquityZen, and Phil’s predictions for the 2019 IPO market.

Links from
the Episode:

Transcript of
Episode 149:

Welcome Message: Welcome to
“The Meb Faber Show” where the focus is on helping you grow and
preserve your wealth. Join us as we discuss the craft of investing and uncover
new and profitable ideas all to help you grow wealthier and wiser. Better
investing starts here.

Disclaimer: Meb Faber is the
co-founder and chief investment officer at Cambria Investment Management. Due
to industry regulations, he will not discuss any of Cambria’s funds on this
podcast. All opinions expressed by podcast participants are solely their own
opinions and do not reflect the opinion of Cambria Investment Management or its
affiliates. For more information visit cambriainvestments.com.

Meb: Welcome podcast
listeners we got a great show for you today. We’re recording this on April 1st
April Fool’s Day. No jokes for you guys today. I’m sitting back in the office
excited because I’ll be travelling to Minneapolis, this weekend. My alma mater
finally made the final four after some grave disappointment last year. So I’m
doing a brief stop in Niagara, in Buffalo. If anyone’s listening come say hello
for a couple of talks and then hitting up Minneapolis. If we’ve got any
Minneapolis followers, let me know. Would love to say hey while in town for a
few days, hopefully four days because that means they make the finals but yeah,
come say hello.

All right, back to our show.
We’re having our guest back after our last conversation last fall, episode 122.
You should check it out to listen to this as a series. He’s the co-founder,
Chief Revenue Officer of EquityZen. Welcome back to the show Phil Haslett.

Phil: Thanks for having me

Meb: So Phil, we got to start
I don’t know where anywhere else we’ll start but we got to start with the Lyft
IPO. You know, this was a big media topic for the past few weeks. It’s been a
big speculation for the past few quarters and it finally came to market. Again
the timeliness I’ll mention it went public when I was in New York City. Today
is the first. By the time this airs this week it could be trading anywhere
between $10 and $200 but it’s right around the issue price. Talk to me about
it. What’s going on. This is a pretty big event in private investing as well as
tech land.

Phil: Yeah, probably the
first real big iconic IPO of 2019, within the tech space. You know, they raised
over $2 billion, $30 billion valuation kind of like the culmination of a lot of
what I think has happened in private markets. It’s going to I’m guessing lead
to the door opening for another half dozen companies that are very large in
size and both their market cap and kind of like how they’re raising money and
spending it. So you know, I wouldn’t be surprised to see Uber come out next.
You know, I think there’s a Pinterest S-1 filed which is like the document they
put out there before they do their actual initial public offering. So I think
it’s gonna be like a big cascade of a lot of tech IPOs coming through.

Med: Well, it feels like
these IPO windows as bankers would like to say are pretty cyclical and you look
at over time that these tend to be maybe grouping. I don’t know if that’s just
an old maiden’s tale or that that’s actually quite a bit of reality. Talk to us
a little bit about IPO process, in general. I think a lot of investors get most
our information may be about all this through the media and so it may just be a
little confusing. But talk to us about first we could talk about from the maybe
the company’s standpoint and then also from the investor standpoint.

Phil: So you want to Phil
Haslett’s IPO guide for dummies?

Meb: Yeah.

Phil: Great. So I think first
off you’re right the way that the IPOs kind of get clustered together is not a
myth or anything. It’s really has to do with the fact that IPOs tend to be the
most successful when the market is not volatile. And Q1 was definitely a big
rebound versus Q4 in 2018 with a big rebound for Nasdaq, S&P, Dow Jones
kind of all of them climbing back up and like the low teams as far as
percentage returns. So if you kind of were to draw a graph of when IPOs are
most popular they would be inversely correlated with volatility across the
stock market. And so I kind of like to think about a bunch of boats leaving the
harbour when the water’s really flat all the boats are gonna go out the same
time. When the water’s really choppy all the boats are gonna stay in. So that’s
my cheesy analogy of the day.

But to kind of cover the
whole IPO process if we kind of work at what the actual event is and work with
maybe a little bit backwards, the actual event of the IPO is the first time
that a company stock has traded publicly on an exchange, where your average Joe
investor can buy five shares of stock through their Charles Schwab account into
their portfolio. It’s usually kind of a badge of honour for a CEO or a founder
for their company to finally go public. Meaning that you know, it kind of shows
that they’re all grown up you know. They’ve moved out of mom and dad’s
basement. And they’re a mature company with real books and records, financial
statements, a full board, an audit committee kind of a whole kit and caboodle.

The way that you get there
takes quite a bit of work. So if we kind of started the beginning of the IPO
process, it probably starts like two years before the company actually lists
and starts trading. The company starts to get all its books in order, it
probably starts doing investment committee kind of walkthroughs because they’re
gonna have to get used to quarterly earnings reports. They’re gonna have to get
used to Wall Street analysts kind of grilling them about why did you do this
and not that? Why’d you hire this person and not that? Why haven’t you tried
for Lyft? Why haven’t you tried teleportation yet? You know, like they’re gonna
get a lot of these crazy questions. So you kind of start by getting all your
ducks in a row maybe two years before you start hiring you know, your formal
CFO that’s gone through this thing before. You start talking to banks, you can
start saying, “Hey, I wanna go public. I wanna finally get this thing out
in the open. Help me get it ready.”

And the next kind of 12-18
months you know, leading up to the IPO are really gonna be a lot of focus on
talking to the banks, talking to potential investors that are gonna participate
in your IPO. And so like the big distinction I think that people don’t really
connect is like the initial public offering the IPO is when Lyft, as a company,
for example, issues a bunch of new shares like $2 billion worth of new shares
directly to mostly institutional investors. And then what happens the day of
the IPO later is that the stock that’s now in the hands of those institutional
traders actually starts trading in you know, Charles Schwab and TD Ameritrade
type accounts.

So they’re kind of like two
different events that happen like within two hours of each other. One is when
you issue a bunch of new shares to the [inaudible 00:06:30] prices and the
Wellingtons, and the sovereign wealth funds of the world. And then like a few
hours later you actually have the stock start trading usually like a bit of a
premium to what that IPO price was. So that’s a kind of a bit of it in a
nutshell on how IPOs work.

Meb: And so you know, there
was a brief period where some of the companies and some of the banks you know,
were trying to disrupt the IPO process. I mean, remember when Google went
public there’s been a couple of traditional models that oddly enough don’t seem
to have stuck when it comes to the way of a companies’ IPOs. Can you talk a
little bit about that, how companies worked with the bankers to actually make
the process happen.

Phil: To kind of think about
the process [inaudible 00:07:09] banks the reason why companies wanted to
disrupt it and avoid it was because going public is super expensive. Not only
just from the amount of paper you have to do to file and register but even when
you think about what goes on with the banks, like the typical rate that you pay
to banks can be anywhere between 5% and 7% of what you raise. So imagine like
in Lyft, case you know, they raised over $2 billion that’s like something like
120 million bucks that could be going out of their pocket. Which is a lot of
money you know. That’s a lot of software engineers even in Silicon Valley. So
it’s something that a couple of companies have tried to think about doing
differently. Where they said, “Well, it’s 2019 how can I get my shares in
the hands of a bunch of investors that wanna believe in my company, invest in
my company without having to use Goldman Sachs or without having to use Morgan
Stanley and paying them a hundred million bucks.”

And so kind of the first
company to give it a shot was Google, I think in 2003 or 2004. Where they
basically kind of ran this auction process and kind of let investors submit
what they were willing to pay for Google stock in the amount and size. And they
kind of did this reverse Dutch auction where they took all the shares that
people reserved and they took the lowest price that would clear everyone and it
didn’t really go that well. I’m not really sure why people say it didn’t go
well other than the fact that the stock didn’t like kind of react really
positively after it went public but I think they did save a ton of money. So
that was kind of like the first version. Then if you fast forward like nobody
did anything too revolutionary for like 15 years until Spotify came around last
year and kind of asked the same question. Which said, “Well, if we know a
bunch of people know our product and we think they’re gonna buy our shares
anyways why do we need to have a bank get all those people together for
us?” And the bank’s you know, of course, defended themselves, “Well,
that’s a process you know, you got to make sure that you make all the
institutional investors happy. You know, I’ve been drinking martinis with you
know, John Doe over a Salomon Smith Barney since we were at Harvard playing
lacrosse together.”

And then Spotify said,
“Well, no everyone knows our product and also we’ve raised a bunch of
money already in the private markets. We actually don’t need more it’s just
this is a chance to kind of have a publicly traded version of our stock.”
So Spotify did what was called a direct listing which was like very new at the
time. In fact, I think like the New York Stock Exchange had to get SEC approval
even to run the thing. And they did it through 2018. They basically said,
“Okay, starting at this point in time if you have shares of Spotify as an employee
or an investor or whatnot it’s basically starting at this point you now have
shares that can be publicly traded. You can literally click a button. You can
sell them through your Robinhood account, you can buy more if you want. And
we’ll use the banks a little bit to help us determine what the fair price is.
Rather than that that’s kind of what we’re doing.”

And so New York Stock
Exchange like kind of helped embrace it. It was a huge success I think the
price of the stock has been pretty stable if not slightly high versus what they
kinda went out at over a year ago. And I think that’s the kind of newer version
that we might see happen over the next call it six or 12 months which a couple
of companies have been considering. I think the rumour was that Airbnb might
consider it and Slack might consider it and those are obviously like two pretty
big marquee software companies in the pre IPO space.

Meb: It’s funny to me because
I’ve always scratched my head and looking at this space as well as, you know,
the traditional single-family home real estate fee space. And it’s like two of
the largest but still most inefficient fee pots of capital with massive fees
that seem just so ripe for disruption. It’s crazy to me that they’re both…it
hasn’t gone away yet but who knows maybe we’re in the early days of seeing this

Well, one more just kind of
broad question and we’ll dig into some of the Lyft S-1 stuff. You know, the
cycle was changed it feels like a bit over the past decade where you had a lot
of this talk a company staying private for longer, the characteristics. Maybe
talk to us a little bit about the characteristics of the firms you know, in
this particular cycle how they may look different than firms that would have
gone public you know, in the late ’90s. As far as age, profitability, some of
the reasons it’s changed all those ideas there.

Phil: Yes, so I’ll caveat
this first with that I started my professional career in 2009, so I actually
have [inaudible 00:11:12]. It doesn’t even look like a cycle to me at this
point. It just looks like an upward arrow. Which I think will actually be kind
of relevant as we talk about this private-public market where like a lot of
these employees at Lyft, and Uber and these investors and all these companies
like actually haven’t seen a down market. Which is kind of crazy to me but I’ll
revisit that in a second. I think the big fundamental change that’s happened
over the last 15 years is that like the value at which companies go public now
is far, far higher and the age of those companies is far much older than they
used to be. So like the best example is I think Amazon, in 19 you know, the
mid-90s went publicly like a four hundred million dollar valuation with $20
million in revenue and like three investors. It was Bezos’s parents, like
that’s two of them then there was one venture capital investor and I think that
was it.

And you know, you were an
investor on day one after their initial public offering, you got to buy into
shares and now it’s a gazillion dollar business. And you got to…like a lot of
the returns were captured in the public markets right? Not the private ones. If
you fast-forward today you kind of have the opposite where there’s so much
capital sloshing around for these companies to take from private investors.
Mainly private equity funds, venture capital firms, family offices, sovereign
wealth fund huge like money managers, etc., that the companies are going
private way later.

And what I think is kind of
not getting captured well in the media especially around something like Lyft on
Friday is that they keep talking about how, oh, you know, we’ve never seen a
company go public that has lost $800 million dollars you know, before. And my
answer was well, Lyft’s doing $2 billion a year in revenue and it’s growing
that revenue 105% a year. There are only eight companies listed on the stock
exchanges in the U.S. with that kind of profile, eight.” And so all the
media likes to talk about, “Oh, my, gosh, this company it’s burning so
much cash.” It’s like I don’t think they’re aware of like what’s gonna
happen next like, Lyft’s numbers look like peanuts compared to some other
companies that are gonna go public as far as losses.

The age of these companies
and the capital they’ve been able to raise has basically meant that they’re
gonna build…they’re gonna spend tons of money upfront on building this
monstrous competitive mode. Whether it’s a network you know, whether it’s
proprietary software, whether it’s vendor lock and they’re gonna build this
moat and it’s gonna cost a ton of money. And the reason why we’ve never seen
these levels of losses before is because no one’s ever been able to raise as
much capital while they’re private. Like no one had the money to spend before
they were public to like have a billion dollars of losses. I mean, Lyft burned
$7 billion before they went public. Like there’s a lot of money sloshing

And so I think that’s the
biggest change you know, if you were like a retail investor starting in let’s
just say 1990 and now it’s you know, 30 years later you before were able to
kind of buy single stocks or buy into an ETF that had single stocks that had
very high-risk, high-reward technology companies in them, in those ETFs or in
your portfolio and now when those companies go public they are enormous. And so
all of that data that you’ve been a part of getting return on those kinds of
riskier investments is basically gone because now you’re gonna get to Lyft when
it’s a 30 billion dollar business.

So I think that’s inherently
the biggest thing that’s changed. And the reason why I mentioned that I haven’t
seen like a [inaudible 00:14:21] my professional career is because, maybe I say
a lot of these things about how you know, Lyft, is actually doing great as a
company even though it’s losing a hundred million dollars a year. I could see
how somebody that lives through the .com bubble and the financial crisis
looking at me and thinking I’m a moron, because you know, there’s a lot of
telltale signs they think they’re seeing a bubble happening all over again. So
that’s kind of why I have a bit of a disclaimer there that you know, maybe I’m
a little more optimistic than others.

Meb: It’s funny because if
you look back to the ’90s and it was such a fun time, I love bubbles. I was in
college. I was at university but I also remember general complexion of the
companies that were going public at the time, there was that yes, they had
losses but in their case, they also didn’t really have any revenue.

Phil: Right, they had
eyeballs right?

Meb: Which they…

Phil: They had like you know,

[inaudible 00:15:08]

Meb: I remember being one of
my favourite trading techniques at time to balance out all my idiotic long
biotechs was too short all the lockups. Because and we’ll get to that in a minute
on some of the workings of how the IPO process works for the investor. But all
these guys they were just burning an enormous amount of cash that didn’t have
any revenues as well it was like shooting fish in a barrel.

Do you think that’s changed
now that Lyft has gone public and you’re probably gonna see this next group
come public? Has it changed the way that companies are thinking about staying
private for longer? Or do you think it’s just gonna continue the way that it
has been where a lot of these early stage companies say, “Screw it there’s
too many drawbacks of being public I’m happy to just stay private until
later?” Or are they gonna start to get some of the animal spirits and
salivate and say, “Okay, wait, this actually looks like pretty cool situation.”
Has it changed at all or is it just sort of more the same of what’s the world’s
coming to look like recently?

Phil: Well, you know, to put
my short-term reaction knee-jerk reaction hat on, on Friday I would have said,
“Yeah, it’s changed for the better all these companies are gonna go
public. Think about how successful Lyft was.” And then this morning when
Lyft was down 10% I feel like maybe things changed a little bit. So what I
think will happen is that companies that have raised all this capital in the
private markets probably want to stay private for longer and longer. Which is
easier, it has less net press they have to deal with, it’s cheaper because they
don’t have to go through nearly as many filings.

But there’s two things that
are gonna hold them back from doing that forever. One is that they have venture
capital investors that are gonna run out of patience at some point right? If
you think about DocuSign that went public last year. DocuSign was private for
like 13 or 14 years. Which means that probably 10 or 11 years before their IPO
some venture capital investor wrote them like a Series A funding round check of
you know, a few million bucks. So imagine if you’re that investor that’s got
its own limited partners it has to report to saying, “Yeah, we got this
huge home run in the portfolio, really excited, the management’s doing a great
job it’s growing, it’s expanding.” And they’re like, “Yeah, but dude
you’ve been telling us that story for nine years like where are the results
like show me the results.” So that’s the one part that’s gonna be hard so
that’s kind of reason one why companies can’t stay private forever in my

Two is that you have to
address liquidity for your other shareholders. So there is a growing an active
pre-IPO secondary market which is what EquityZen does. And I think you really
need to address that piece if you’re gonna wanna stay private for a really long
time. And so I think the combination of those two things is probably gonna
continue keeping companies to go public at some point.

I would say like the third
and fourth reasons to do it are more publicity for your brand right? So like
Lyft can only advertise so much or give away so many free rides so getting some
additional prominence by being up on the exchange floor.

And then the fourth one is
having a currency for acquisitions in the future. So now when Lyft goes and
buys I don’t know some autonomous vehicle software company they can now issue
you know, they can use their own Lyft stock that’s publicly traded as currency
for doing that as well.

So I think we’re gonna
continue to see companies coming through but it’s gonna be really important for
them to kind of as you said kind of like control this narrative. And like
really describe why they look so different than a company might have looked 10
years ago which is like why are you losing $700 million? And the answer is well
because we’re also growing top-line 100% a year as a giant company. It’s like,
it’s kind of just this new normal to get used to.

Meb: Let’s talk a little bit
more about Lyft and then we’ll hop over to some other topics. You know, you
guys put out a lot of great material around the IPO whether it was kind of
infographics or the various funding rounds that I think was instructive. And there
was a couple of things that I wanna use as jumping off points. The first maybe
talk to us a little bit about the S-1 and just to the listeners you mentioned
already what that doc is. But is there anything in that document that, you
know, when they put it out that you guys put out a great review that was man 15
pages probably. Is there anything that stuck out as particularly interesting
that you thought was something that was either a surprise or thoughtful or
anyway just stuck out in your mind?

Phil: For one like I’m a
pretty big like securities and like stock like geek. So reading through an S-1
is super exciting because you know, we can hypothesise on how these companies
are performing and where they’re spending their money and everything. But the
S-1 is the first time where you get basically 300 pages of like a history
lesson of what Lyft has done and what it plans to do in the future and that
kinda goes for any other company. And so I get a big kick out of reading them
you know. We managed to condense it down to 15 pages. I’m sure the first draft
was probably 30 pages. And when we really like boiled it down I think one of
the most interesting things for me is that Lyft spent $300 million on research
and development in 2018 up from like I think 50 or 60 million dollars two years
before that. So I say that because people kind of talk about, “Oh, Lyft
this start-up worth $30 billion,” like no, this is a tech company that’s
spent $300 million on research and development. Likely a lot going towards
autonomous vehicles and driving to probably try to get kind of a first mover
advantage in that space.

I think that’s probably one
of the most interesting parts that came out in the S-1. And then I would say
the second part of the S-1 that was a bit more of like a recurring theme was
Lyft has positioned itself as a transportation as a service company right?
TaaS, transportation as a service company where they want to handle end-to-end
transportation for any individual human being on the planet. Which means they
want you, Meb, to get on a scooter somewhere go from your house to another
location. Hop into a car with a couple of other people that’s driven by a robot
eventually, get to another destination and then from that and hop on another
scooter and get to work.

They wanna handle like that
whole end-to-end piece and they’re focused exclusively on the transportation
piece. And I say that because they’re trying to create some space away from
what Uber’s kind of description is gonna be of themselves when they go public
and who knows maybe a month or two. Uber is gonna talk about how they are a
global logistics and transportation company right? How they are handling moving
any item of any size from any point A to any point B.

And so I think those are the
kind of two things that I really found interesting about an S-1 is how much
money Lyft is spending on kind of the future which is why they’re probably
burning so much money? And also how they’re really like how they found a really
kind of I think nice clean way to isolate how they look as a company versus
Uber. Because actually when you think about it like Lyft is you know, it’s a
start-up, you know, it’s high-growth. But it’s also like it’s probably one of
the most interesting pure-play transportation investments you could have out of
public companies, right? Could you build a portfolio of General Motors and
other car companies? Sure, but you’re gonna have to pay for a lot of inventory
that’s built on there like a very capital-intensive business. But if you wanna
kind of make an investment on how transportation might work five, 10, 15 years
from now, Lyft is kind of a is…it is a really interesting way to get that
kind of exposure or to express that kind of view as an investor.

Meb: You know, it’s funny to
look back because LA is really the perfect test market for something like a
Lyft. Because public transportation is so terrible here but everyone has to get
around. It’s such a huge city. And it’s just funny to look back I mean, there
was a local app called Taxi Magic. It was really kind of one of the first
variations because it used to cost $150 across the city. And so you would often
hear people if they were gonna go to a dinner downtown or to Silver Lake or
somewhere that would take an hour to get to this LA traffic. Half the time
people say, “Look I’m just gonna drive and get a hotel room.” You
know, and so that was probably one of the origins of HotelTonight now Airbnb as
well. And so this massive disruption to taxi magic happened and then I guess
you know, the Ubers and Lyfts came along. And I remember taking my first Lyft,
and this kid picked me up in a just dumpiest station wagon and he drove us to
pick up some beer and then just go. Yeah, I mean, it was just like the most
ridiculous I’m like this business you know, it…that was back when everyone’s
assumed everyone was gonna get murdered in their Uber.

And so I’m rambling a bit but
you know, it’s funny to walk forward and see it now as this major corporation
where they’re doing scooters. Which probably for a lot of people seemed like a
dumb idea at the time too but now they’re all over. It’ll be really fun to
watch kind of evolve over the next few years. One of the things that I think
it’s really instructive that a lot of investors don’t understand well is the
concept of dilution. And so Lyft has gone through I don’t know how many series
of the alphabet. They were probably halfway through the alphabet before they
went public. And so listeners if you’re not familiar with venture capital you
know, the way that private investing works, is every round has a different
letter and they keep going. And you know, we saw some reporting recently where
on the Carl Icahn, I think he got in around a two billion dollar valuation. And
then and this was originally there’s Lyft’s gonna go public at $20 billion and
everyone’s like, “Oh, my god, Carl, made 10 times his money,” but
lost in that was this topic of dilution. Could you tell…could you like
describe that a little bit for the audience because I feel like it’s not a
well-understood topic for a lot of people.

Phil: Totally. So I think you
know, as a bit of background as kind of doing the venture capital for dummies
piece, you know, a company will go through multiple rounds of funding over
their life cycle before they become a public company hopefully. And you know,
the first investments are usually smaller in size and give you a certain
percentage of the company. And the ones that are later in the state are usually
much larger checks for smaller percentage pieces of the company. But the way
the kind of dilution works is that even when you talk about when Lyft went
public you know, it raised to two and a half billion dollars of cash and in
exchange had to give up you know, a meaningful piece of their company. What
that means is that as companies grow in valuation your percentage ownership of
the company is gonna get diluted over time. So if we give an example let’s just
say Meb, you and I start a company together and we each get 50 shares out of a
hundred total shares. So you own half of it and I own half of it.

So when we go and we raise
some money from another investor and they give us cash in exchange for let’s
just say a 20% ownership stake what actually is gonna happen is that we’re gonna
issue that investor 25 new shares. And the reason why it’s 25 new shares is
that now that investor is 25 new shares over the 125 total shares is a 20%
ownership stake. So you and I used to have 50% of this business but now each
only have 40% and that’s basically because of the diluted effects of that new
investor coming in.

So think about that happening
not just once but as you mentioned through the first nine letters of the
alphabet series A, B, C, D, E, F, G, H, I which is…I just pulled it up is what
Lyft had. And think about some really large rounds where instead of just giving
up 10% or 15% of the business you might have given up 25% or 30% of the
business. As you do that over time your ownership stake [inaudible 00:25:48]
can get drastically reduced.

I think like the best example
of this was in the Box IPO where Aaron Levie, was like a sole founder maybe a
few years ago. Everyone was really excited and said you know, all these
journals already know like, “Oh, my, gosh, Box is gonna be worth billions
of dollars. Let’s do a piece on how rich Aaron Levie is.” And they looked
at it and they said, “Well, yeah, he’s pretty wealthy but he only owns
like 4.8% of his business.” And everyone said like, “Well, how is
that possible what did he…was he just you know, handing out shares to people
just for fun?” And the answer is no like you own a hundred percent of the
business, you give away 20% of it a bunch of times. You can be left with a
meaningfully smaller piece than you started with. And we’ve actually kind of
seen that with Lyft as well, you know, the two co-founders own… I don’t have
it in front of me but I guess probably each own like less than 10% of the
business and just because of the way they’ve had to raise capital.

So I think that is also like
another consequence or yeah, I guess consequence is the right word of how
companies are raising capital now. Is that they are hoping that they’re gonna
have a five…you know, founders are hoping they’re gonna have a 5% or 10%
stake of a $10 billion business as opposed to going public having a 50% stake
of a $400 million or $500 million business. Which is an important calculation
to make as a founder of the company you know, like even so I’m you know, the
founder of our company like I think about these things a lot. Is it you know,
there’s a lot of risk-reward of building out of business that’s gonna become
billions of dollars potentially in size. Knowing that the risk-reward you know,
the things you got to go through to succeed to get there are really hard. But
obviously, the size of the pie is gonna be so huge versus what if we build kind
of like a stable, steady, recurring business model that never becomes a
bajillion dollar business but we keep a lot of control and ownership. Like
those are kind of the types of topics that you have late nights over a couple
of scotches with your co-founders to talk about you know, what’s most important
to you?

Meb: Well, let’s say…and
the example by the way real quick was that we’re thinking about with the Carl
Icahn you know where all the media was saying, “Hey, he made like he made
like, 10, 20 times his money,” or something. But because the dilution
ended up being I don’t know three or five times his money which is still cool,
by the way, uncle Carl put $200 million in you know, it’s nothing to shake a
stick at but also not totally accurate. And the public market equivalent that
we’ve talked you know, to the moon about here is this concept of buybacks and
share issuance. Where a lot of investors whether or not they understand that
and most of the media doesn’t and politicians in the same category you know,
buybacks have the ability to increase your stake if you’re not selling. But the
benefit of using that in a screen which we call shareholder yield is that you’re
also avoiding companies that are issuing a ton of stock largely in the public
markets that’s through options but also through fundraising. And it’s not to
say again issuance is neither here nor there. It just changes the equation and
people need to be aware of it and a lot of people aren’t.

Phil: That’s actually really
interesting thinking about it like coming in both directions right? You’ve got
new companies like coming out of the woodwork going public that are like
heavily dilutive and kind of continue to dilute it, right? Like Lyft’s probably
gonna raise more money in some new offering like six months from now. And the
other end of the spectrum you’ve got the incumbents you know, you got a car
company here. So you’ve got another company that’s saying like, “Oh,
actually instead of us issuing stock to grow we are doing the opposite. We are
like kind of retracting into our shell a little bit and we’re gonna go buy out
a bunch of the shares to make the…to make your ownership stake go up right?”
It’s kind of interesting to like see boats under the spectrum kind of

Meb: Yeah, and we talk a lot
about this. The best book that I think people can read on the topic is
“The Outsiders.” And it talks about a lot about the importance of a
CEO’s role of public companies in particular. I mean, it’s for all but public
companies’ capital allocation. And so what they do with their cash because
there’s only five things they can do with it. They can reinvest in the
business, they can pay down debt, they can go acquire another company. And then
two, ways they return it to shareholders through dividends and buybacks and
that’s it. You know, those are the only choices available. And so when you get
to a certain size like an Apple, there’s a lot of these companies that just
simply can’t invest enough or don’t have enough projects that have a good
return of capital.

And the thing that trips
people up in public markets is they confuse dividends and buybacks which are
essentially the same thing borrowing taxes. Buybacks being a lot more flexible
but the thing that almost everyone misses is the opposite side of buybacks
which is share issuance. So you could have a company, for example, with a 4%
dividend yield but happens to be issuing 5% shares each year to management through
options essentially has a negative yield. And so anyway it’s something that I
think the whole takeaway is to look at it holistically whether just looking at
one lever it doesn’t make a whole lot of sense. But we could go on about that
for hours.

Phil: Well, actually one
thing about that I think it’s helpful to know is when you ask somebody like,
“Oh, how does a market cap get calculated for a company?” Like I
found that like even when you talk to very like senior equity analysts at banks
and other folks and venture capitalists like no one has like one true north of
how this market cap gets calculated. Meaning that like as you kind of said…as
alluded to you like a company with a 4% dividend yield and a 5% issuance record
in like you know, 2018. It’s very easy to kind of like throw in and issue a
couple of shares here and there like left and right throughout the year to
executives, for promotion, for warrants, for other things. And so yeah, I think
that’s like a really good point to highlight for listeners is that like it’s
annoying because it’s happening and it’s actually hard to track you know. A
dividend yield is very easy to calculate. Like I feel like the number of shares
being issued in a given year is actually kind of hard and the way that they calculate
market cap is pretty hard too.

Meb: The simplest way I think
investors can visualise it there’s a great piece of software called YCharts.
Obviously Bloomberg does it and others but those are not widely available. And
if you simply look at a shares outstanding field over time and you can chart it
on YCharts it’s pretty cool to visualise because you have these companies. You
wanna see, in general, the historical record shows you what companies that are
as Charlie Munger says, “You want the cannibals so reducing share count
because you own more.” But that also correlates very highly to companies
that have cash in the first place to be utilising it so usually, they have to
make money or high-quality businesses reducing share count which has been a great
place to be. But you can visualise how the shares outstanding changes over time
because a lot of different companies some will do it in one big starburst you
know, or they buy a bunch and just stop. Others will reduce at X amount every
quarter. Yeah, and so it’s a…and others again on the flip side will be

So it’s one of the reasons
people struggle with this metric factor in public markets is because you can’t
usually just look up buyback yield or shareholder yield on Yahoo Finance
because it’s not as stable as dividend yield. It gets a little confusing people.
Anyway, that’s why we wrote a book on the topic but oh, well. All right, so a
few more things I wanna dive into one is you know, so the, let’s say an
investor who’s been around whether it’s Carl or someone else. Talk about how
they eventually get liquidity because most there’s a lock-up period. Am I

Phil: Yeah, that’s right. So
yeah, you know, we kind of talked a little bit earlier about how the IPO is
kind of the issuance of these new shares to investors. Like you know, let’s
just assume that it’s like a fidelity mutual fund that buys many shares of the
Lyft IPO. So you know, the next question would kind of be like well what
happens to all the people that already own shares in Lyft like what are they
able to do? And a way to make sure there isn’t absolute and utter chaos on the
first day of trading is to require each of the existing shareholders of Lyft.
So that’s basically the founders, their early investor anybody that bought
shares in the secondary market, their current employees, their ex-employees.
That whole group basically has to sign on to agree to not sell their shares in
the public market for the first 180 days. That’s kind of a typical standard. I
think I’ve seen some that were a little bit longer but almost all are basically
180-day lock-up.

So what that means is that if
you are Carl Icahn, and the IPO for Lyft happened on March 29th on Friday, you
saw that shares were worth somewhere around 80 bucks, $79 and you got to mark
your position there. But rather than saying, “You know, what I think it’s
a fair price for Lyft I’m gonna get out of my position.” You can’t you
have to sit and hold and wait and pray and keep your fingers crossed until,
what is it? September 29th. So that is kind of the six-month lock-up period and
what that may lead to and I think maybe you’re kind of alluding to this in like
you know, in the late nineties is that in companies where a lot of those shares
are locked up and for like Lyft’s example, it’s gonna be like 90% of the shares
outstanding? That means that like on September 29th on that’s six months like
anniversary you may see like a ton of downward pressure on the stock because of
all these people saying, “Oh, thank God, I can take some chips off the
table.” And sometimes that can lead to a retreat of stock price right
around that extreme going away. And so that’s kind of what we’ve seen.

And then to kind of
extrapolate on that one of the things that frustrates me a little bit on how
these IPOs happen and how trades happen after it goes public is that everyone’s
talking about how Lyft’s stock is performing you know, even just two days in
right? So we’re on Monday, April 1st right now and you know, it’s only the
second day of trading and people are saying, “Oh, my gosh, it’s down a
lot. It’s below its IPO price. What’s going on? Why are people dumping their
shares?” The funny thing is this is like a thirty billion dollar company
where only 10% of the stock is actually tradable like in anybody’s hands
because all the other shares are locked up. So you’ve got a thirty billion
dollar company where only $3 billion worth of shares are actually exchanging
hands. And all those people who were given it or were issued the shares on
Friday morning. So like it’s not an accurate reflection of what people really
think about stock because you basically have like an amplifier of stock
movements right? Like only one-tenth of the shares are dictating what all 100%
of shares are gonna be worth. So that really means that if there’s bad news
rather than a hundred percent of the shares exchanging hands in any given point
there’s only 10% that are able to do it. You gonna have some really wild

And so what I would imagine
is gonna happen is like on Lyft’s first earnings report and this goes with
really any tech company that goes through this. Like Lyft’s first earnings
report is gonna have a very big piece of news that says how the company’s
performing. And then one-tenth of the shares outstanding that are actually able
to exchange hands are going to exchange hands based on people’s interpretation
of those earnings. And so if the earnings are really good you’re gonna see that
thing skyrocket because there’s such a limited quantity of shares to buy.
There’s more shares like that you know, just kind of supply-demand economics or

And then the opposite’s gonna
happen too where if the company has a not-so-great report there are gonna be so
many people looking to sell but there’s only so many shares that you can use to
sell. And so one of the kind of interesting almost like technical disadvantages
I think of how these lock-up periods work is that you’ve got this like six
month period of just like what I think is a lot of like embedded in unnecessary
volatility and stuff.

Meb: Yeah, I mean, it’s an
important topic talking about float and how much I laughed about how, you know,
it used to be shooting fish in a barrel but on the flipside one of my…back
when I was a discretionary trader a million years ago. One of the biggest
trading losses I ever had was shorting a lock-up to where no one sold and all
the insiders were long-term investors and then instead of it crashing it ran.
So I’ve got a lot of scars from both sides. When do options start getting
involved? Can you know, let’s say you’re one of the Lyft founders who has no liquidity.
I’m sure they’ve diversified and are totally fine. But I wanna talk a little
bit about how investors think about if they own a lot of private stock. Two is
once the IPO happens is there anything they do. And any other ways to buffer
potential concentration risks all those sorts of topics.

Phil: What I would imagine
has happened from you know, early-stage investors and Lyft, for example, like
some of their venture capital investors, etc. is that over periods of time they
probably sought to sell some of their shares before the company’s even gone
public for like a pre-IPO secondary transaction. Where let’s some series A
investor that put in cash into Lyft you know, eight years ago has found buyer
and purchaser off their shares is being able to take some chips off the table.
So that’s kind of like one thing that I would expect to see.

And then a post-lock-up I
would expect that a lot of these investors are going to sell their shares kind
of systematically into the market. You know, not all in one fell swoop but over
some period of time pay some fees to do that, return a lot of the capital to
their ending limited partners, right? So each venture capital firm. If we kind
of think of the VC industry each venture capital firm is basically funded by a
bunch of limited partners. So the investor has its own investors and has an
obligation over time to return money to those limited partners. So you know, if
you’re in Lyft and your let’s just say Andreessen Horowitz that’s making
something like $1.2 billion off of their $60 million investment in Lyft. You’re
gonna return that money you know, six-12 months from now. You’re gonna return
to those limited partners. And you’re probably gonna time it where you’re gonna
return that money just at the same time you’re gonna let them know that you’re
raising a new fund, right? A new venture capital fund. You know, Andreessen is
gonna go, “Here’s your 1.2 billion. We’re gonna keep our performance. Also
I did wanna let you know, we have to be back in the market, we see some really
interesting opportunities and would love to manage your money again.”

So that’s what I think is
gonna happen on kind of the institutional side. On the founder’s side and on
the early employee’s side you know, they still are gonna have to wait until
that six months is up. You know, what I would advocate for you know, disclaimer
that this isn’t a financial advice and you should talk to your professional
RIA, etc. Is if you’re a Lyft employee and you’re holding a bunch of stock and
let’s just say six months later the stocks perform really well and Lyft’s at
100 or 120 or 140 you may be kind of tempted to say, “You know, what I’m
gonna kind of let this ride for a little bit.” I would suggest you don’t
because if you’re still working there you basically have your net worth and
your source of income tied to the same place. Which is probably both exciting
but also financially not the most prudent thing to do.

So you know, I’m a normal
advocate of you know, particularly younger people as well kind of getting their
money into equities in a very diversified way that cost them very little money.
Holding a bunch of shares of Lyft, and working at Lyft is a very concentrated
way of having equity exposure. So that would be my advice to anybody if they
would asked me.

Meb: Yeah, and on top of that
you have obviously the considerations of taxes. And you know, there’s a lot of
ruminations at this point. The cycle about all of the spill-over wealth effects
you may see. And you know, I was thinking about this morning over coffee where
there was an article in the journal talking about how you know, if all these
companies go public in the Bay Area or LA or New York or whatever its gonna
create this just large pool of young millionaires that part of the concept was
they would turn around and many of them become angel investors also buying
homes and things like that and the implications. And so part of me was like all
right, you know, that this is some signs of tops. But also part of me I like to
try to be balanced thought about how what sort of like renaissance of young
early investors would look like if all of a sudden you armed you know,
thousands of investors with seven-figure portfolios, eight-figure portfolios of
wealth? And what depending on how they planned on using it maybe they’ll just
consume it and buy jets but maybe they’ll turn into angel investors. Anyway,
what the implications that might be?

Phil: So I have one very
funny story about this that you’ll find probably kind of entertaining. So you
know, EquityZen, so what we do is we help you know, these employees and
ex-employees at private tech companies with liquidity while the companies are
still private. And so we got reached out to by a…this is a random partnership
opportunity. We got reached out to you by a very nice real estate developer in
San Francisco, that had built a flashy beautiful condo building. And was
planning to sell one to eight million dollar price units to the future of
millionaires of San Francisco. And they had built the building with the hopeful
timing that it would coincide with a bunch of these big unicorns going public
and all these employees getting a bunch of cash and then buying their
apartments. And it turns out it was now 2019, they built the building, they
were not selling units as fast they were hoping to. And so they actually called
us and said, “Hey, could you give a talk to a bunch of these employees of
pre-IPO companies and tell them you know, if there’s…if they’re able to sell
their shares now they can.”

And to me, it was just kind
of remarkable that like I had found a way for our business or somebody had
found a way to partner up with us because they had built a multi-hundred
million dollar property in San Francisco banking on all this liquidity to come
through. So you know, it’s like you said it’s kind of maybe it’s a sign at the
top but it’s no joke right? Like I mean, people are putting they’re really
believing in it but I just thought it was kind of a crazy story that a real
estate developer wanted to talk to me for some reason.

Meb: It’s easier today at
least you know, and you guys helped facilitate that where companies and we
talked a little bit about this on the last podcast. And individuals at least
can hopefully find liquidity on the way so that they’re not just 100% stuck
with this investment that represents 99.9% of their net worth they can’t do
anything with. And it’s interesting once you do have a public investment that
is a large concentration and trying to avoid the taxes is tough. But for a long
time, financial advisors have been marketing these exchange funds and I know
people are trying to build something like that in the ETF structure to help
avoid taxes. But often as we all know the IRS will not be denied when it comes
to these topics.

Thinking about the private
landscape, so we’ve talked a lot about the process, we’ve talked a lot about
the way IPOs happen and concentration and concentration risks. Think about
Alton General. You know, there’s a lot of platforms out there today, there’s real
estate, there’s crowdfunding, there’s all sorts of different stuff. What do you
guys kind of think about as you think about the lay of the land, access to
Alton investments? You know, how should investors be approaching and navigating
this? I don’t know if you want to call it an asset class, do you wanna call it
a space? And what sort of opportunities are available? Any ideas?

Phil: Yeah. So I’ve given
this a lot of thought. I think first off you got…you almost gotta identify
yourself as an investor and kind of which route you are. So when I think of
kind of individual investors getting into alternative assets right? Not
institutions but individual investors getting into alternative assets. One big
part that will determine which path to go is if you have your own wealth
manager or not right? So if you’re your own self-directed investor you’re
putting together your portfolio yourself consider yourself this we’re go down
the self-directed path and maybe I can talk about that. If you have a wealth
manager things are gonna be a little bit different.

If you have a wealth manager
that works at Morgan Stanley, you may get access to offerings to Morgan
Stanley. They give you exposure to hedge funds, private equity funds etc. Maybe
at like relatively large clips at a time but you might have some more exposure
to managers that way. If you don’t go through a wealth manager and you’re kind
of doing this a la carte as I’d say, right? You’re kind of like choosing your
own adventure and how you’re gonna do things, then I think it’s super exciting
really. Because 10 years ago if you wanted to invest in like a hedge fund and
you needed a quarter million to a million dollars and you needed to know the
manager, right? Like you needed to know the manager that’s managing the fund.
You had to contact them. You had to say, “Hey, you don’t know me but I
have a quarter million dollars and I think what you’re doing is super
exciting.” It’s kind of hard to do when you have like a full-time job and
you know, I don’t know a whole life with kids and a dog and everything.

So what’s happened now is
that now you have like this kind of this full spread, right? This like kind of
buffet of real estate offerings, you’ve got hedge fund offerings, you’ve got
pre-IPO or private tech offerings, a lot of different things. I guess the part
I would say is, one you wanna look into the fee structures involved because I
think fees can add up really quickly. So I think that’s super important. Two is
you wanna diversify as much as you can.

And it’s actually that’s
easier said than done across a lot of these alternative platforms because the
minimums that they have on transactions relative to what used to be available
to you right? Are great you know, we’ve made very big leaps and bounds on
offering something that you used to require a $250,000 check down to a $10,000
check that’s great. But let’s just say that you’ve got $500,000 of assets to
invest with and you wanna allocate 20% of that towards or let’s just say 10% of
that to alternative assets. Because that’s what seems appropriate and what you
can kind of stomach as far as kind of risk-reward goes. Well, that leaves you
like 50 grand to invest across different assets. If you’re putting 10,000 of it
or 20,000 of it into one single crowdfunding company that makes I don’t know
you know, artisan dog socks or something. That’s not gonna pay out for like
many years and that’s really like a low hit rate but it’s really hard to get a
lot of diversification.

So I guess what I would say
is the advice I would give is try to build as diversified a portfolio as you
can across multiple investment offerings and across multiple platforms as you
can. And also kind of a targeted percentage of your portfolio that you’re gonna
allocate towards and probably try to stick to it. And then lastly is having a
real conversation with those that are closest to you on when you might need the
money that you’re putting into these investments back. Because I think the one
thing that I…we might see coming you know, once this 10-year bull run ends is
I think there’s gonna be kind of a day of reckoning. Where a lot of people got
into these alternative investments and did not think through the fact that
investing in a private equity fund even at only 10 grand or investing in an
angel investor or like kind of making an angel investment. I think a lot of
people are gonna underestimate how illiquid these things really are. And that’s
gonna be an interesting part. So that’s kind of the one thing I would say is
kind of a self-directed investor is the money that you put into alternative
platforms online you should think about when you’re gonna get that money back
reasonably. Think about if you’re okay with that period of time and then kind
of make a decision if you wanna go forward.

Meb: I imagine particularly
in booming times investors probably overestimate their timeframe and ability to
really have the wherewithal to sit. I mean, meaning like a lot of people say,
“Oh, yeah, I could probably put 10 grand in XYZ startup or on a private fund.”
And then you know, three years from now you have a health issue or you lose
your job or you go through a divorce whatever it may be or you just you know,
or wanna buy a house. You don’t really have too many choices a lot of times
with private investments, you’re kind of stuck. And that’s one in many ways I
think a benefit and a feature because people tend to do really dumb stuff with
the public investments. But I think people probably overestimate how stuck they
really are if they invest in a private company.

Phil: When we…when I talk
to like some wealth managers and talk to their end clients, I have a
conversation with them about you know, I ask the wealth manager I say, “So
how do you think about these alternative platforms and these angel investments,
etc., for your client?” And the usual response is…and the recurring one
I’ve heard which makes a lot of senses is, “Every year I have a
conversation with that client. We determine what percentage of his portfolio is
gonna go towards that strategy and we agree that if that part goes to zero
they’re okay with it.” Right, like we put that into a very risky bucket.

It’s kind of like we’re gonna
put that into the bucket of like when your son says that he has an indie film
that he wants to produce and you give him 50 grand like you’re gonna put it in
that bucket right? And they put the money there and like they have the
agreement and that way the wealth manager doesn’t say, “I don’t think it’s
a good idea, I don’t think it’s a bad idea.” They don’t say anything. They
just say, “All right, cool you got 50 grand over in that bucket. Have fun.
Put it on EquityZen, put it on AngelList, put it on YieldStreet, put it on
RealtyMogul, etc. Like, go do what you want with it so long as you and I both
know that it’s not gonna be a material impact to your financial picture if that
thing goes to zero tomorrow. And I think that’s kind of like the right approach
you have to make to some of these alternative platforms.

Meb: Except the client never
actually believes that it’ll go to zero. They say, “I’m cool with
that,” but wait till it happens.

Phil: What are the odds

Meb: What are the odds?

Phil: [inaudible 00:49:52]

Meb: Talk to me a little bit
to the extent you can about the future of the private investing space. And I
don’t mean as much the future of venture capital but you can talk about that if
you want. I mean, SoftBank is a particularly recent major you know,
gravitational force. But what I’m really thinking about is you know, you’ve
seen the development of these platforms you mentioned AngelList which is a
little more early-stage traditionally. You guys traditionally focused more on,
on a later stage private. But as the world changes, as new legislation happens
I would love to hear about how you kind of see this space evolving over the
next five to 10 years. Will we see more private exchanges? Is there something
like that that is feasible? Any other ideas I would love to hear you ruminate

Phil: I think it’s gonna be a
delicate balance that will eventually get towards more of like quasi-public
private stock exchanges. Where shares can exchange hands but the burden on the
companies isn’t nearly as high as being a public company. And I think where the
balance comes from is that on the one hand, you’ve got companies that want stay
private longer and longer and raise capital from the SoftBanks of the world
etc. And you may wanna make those investments actually available to everyday
investors more and more. But you’ve got regulatory pressure where the SEC and
FINRA where these governing bodies want to ensure that your everyday investor
doesn’t get hosed right? Doesn’t get sold snake oil.

It’s kind of like what you
saw with cryptocurrency is like the second it became really popular, two things
happened. A bunch of really crappy ICOs and initial coin offerings came out
that were complete frauds. And the SEC decided that they were gonna take a very
serious look on how these things were being done and whether they could be you
know, the governing body or the right regulating body over the things.

So I think a slower version
of that because nothing moves as fast as crypto does up or down, is that what
you’ll see is individual investors are going to clamour for access to the Lyfts
of the world, the DocuSigns of the world, the Ubers of the world because they
want to participate in these things that do pretty well and perform well. And
the companies are gonna eventually want to stay private longer so they’re gonna
have to kind of accept that that’s kind of the new normal. And then you’re
gonna have a regulating body that says, “Well, we got to make sure that
this whole new system doesn’t get abused.”

What I think that ends up
looking like is like five 10 years from now you’re gonna have kind of this
quasi-public-private exchange where there is a more robust marketplace that’s
active, that has like bids and asks where people can buy and sell shares of
private companies. The disclosures required from the companies on how they’re doing
is gonna be relatively limited compared to what they do for a public company.
But far in excess that what you get available now from private companies. And
there’s gonna be a real close watch on it from the SEC and FINRA and probably
from Congress on how those things work. It’s gonna kind of be like maybe a
grown-up version of the JOBS Act that was what was an attempt for kind of
crowdfunding to become available.

So that’s kind of where I see
things evolving towards but I think it’s kind of a mutual benefit to the
investors because you’re actually gonna get some of those returns back. Like I
get a little pressure on how like venture capital as a whole works where like
20 or 30 funds are kind of in my opinion kind of like sucking all of the alpha
out of you know, the entire tech industry away from like your individuals. So
anything that can kind of reverse that trend I’m a big fan of. And so that’s
what I think we’re gonna kind of end up at.

Meb: For you guys
specifically putting on your equities in a hat. I’ve seen some announcements of
some potential new offerings you may or may not be able to talk about them. But
what does the future look like for you guys? Is this a situation where we’re
starting to bounce around some other ideas about the future of private
investing? What are your thoughts?

Phil: Yeah, so you know, at
EquityZen, we’re able to make these investment offerings available in late
stage companies. We’ve worked with about 140 different private tech companies.
A lot of which have you know, gone on to go public and we’ve been able to kind
of deliver these public shares to these investors. But right now for one, we’re
limited to just offering this to accredited investors which means that you have
to have $200,000 of annual income or a million dollars of net worth. Which
obviously is kind of a small sub-sector of you know, the overall population.
And so we’d like to continue exploring how we can make this available to the

And I think the second part
is you know, we talked about some of these minimum investment sizes you might
see on platforms right? Ten thousand dollars at a time, $20,000 at a time. The
more and more we work on our products, our technology, our platform the more we
automate things away in the transaction process. The more efficient we can be
and therefore the smaller the investment sizes we can offer. And so I think the
two focuses we have on our side or really the three are longer term can we make
this investment offering available to investors that aren’t just accredited?
That’s one. Two is can we lower the minimum investment size you know, using
technology and standardisation of the transactions? And then I think three is
continuing to make available an investment product that is diversified. So that
means not just offering investment in, you know, one private technology
company. We’re making available an investment where you kind of almost have
like a mutual fund type offering where you can invest in 15 or 20 or 25
companies. So those are kind of the three things we’re working on right now.

Meb: Did I see mention you’re
also thinking about potentially other asset classes and ideas as well? I know
your main focus to date has been late-stage private companies. Are there any
other things you’re thinking about?

Phil: Yes, so you know we’ve
looked at I don’t wanna give away too much on what our next kind of iteration
might be. But what we have learned is that we built kind of this infrastructure
for liquidity right? For very illiquid assets and we started with pre-IPO
secondary stock and it’s gone really well. You know, we’ve been able to provide
a lot of value to somebody that wanted to sell shares in a private tech company
and connect them with someone who wants to buy. Turns out there’s like an
analogy for that in a lot of different asset classes that hasn’t really been
addressed yet. We actually even with market sizes that are probably in excess
of what we’re doing on the pre-IPO side. So the answer would be kind of stay
tuned there but our plan is that you know, we may launch a couple of new
offerings in different asset classes that investors may feel very boxed out of
right now. And that shareholders may feel like there’s no means of liquidity
for it and try to kind of connect the dots which is what we’re getting known for.

Meb: Well, if the long-time
listeners the last 150 episodes know this well and dear because I have a
farmland in Western Kansas. It is 95% plus individual or privately owned.
There’s almost no public way to access that asset class which is probably good
over the last five years because it hasn’t done a whole lot. That’s a big
interest for me so fingers crossed there.

Phil, last couple questions.
I’ve already kept you over an hour. You got any predictions for us for the rest
of 2019 who’s gonna be the biggest splash? And you mentioned, you alluded to
earlier something about Lyft losing a lot of money but you ain’t seen nothing
yet. What were you talking about and what are your predictions for the rest of
the year?

Phil: So I kind of get two
predictions for our space, you know, meaning like I kind of this late stage
pre-IPO space. The first one is that I think we’ll see another direct listing
kind of [inaudible 00:57:13] Spotify by the end of the year. So we’re gonna see
a company that says, “I’m not gonna pay that 5% fee or 6% fee for the
initial public offering. I’m gonna just list my shares directly on the
exchange.” So I think we are gonna see one of those.

And then again, yeah, my not
so bold prediction. I think is that we are gonna see probably two or three
companies go public by the end of the year in the tech space…in the tech
industry with over a billion dollars in you know, trailing 12-month losses. And
so I think it’s going to really highlight how some companies in the private
markets have raised literally billions of dollars and are spending it very,
very aggressively for the sake of top-line growth and capturing an entire
market. So like I wouldn’t be surprised to see WeWork, for example, go public
with a huge top-line valuation while having burned multi-billions of dollars in
the previous year. So those are my two kinds of bold but not so bold
predictions for 2019.

Meb: Well, we’ll just have to
keep having you on as these events transpire. I think we mentioned what’s the
best place for people to find you if they wanna keep up with all of the goings
on in your world and with your firm.

Phil: Yeah, absolutely so if
you go to equityzen.com you can kind of take a look at everything we have
there. We also have a knowledge centre so if you just do
equityzen.com/knowledge-centre we kind of keep track of IPOs, pre-IPO research
trends, performance of different VCs, etc. So kind of a one-stop shop for those
that are trying to learn a little bit more about the pre-IPO space.

Meb: Great, we’ll add a link.
You guys are a fun follow on Twitter as well so we’ll put all these on the show
notes. Phil thanks for joining us today.

Phil: Thanks for having me
Meb. That was fun.

Meb: Everybody you can go
find links to this episode, a lot of the show notes we talked about today
mebfabershow.com/podcast. Shoot us an e-mail feedback@themebfabershow.com. If
you wanna hang out in Minneapolis or you got some suggestions, complaints you
can always find us on iTunes, Overcast, Stitcher, RadioPublic anyplace good
podcasts are sold. Thanks for listening friends. Good investing.